Tuesday, July 22, 2008

Assured Guaranty (NYSE:AGO): Bounce @ $10?

Assured Guaranty (NYSE:AGO) is trading down 50% in pre mkt after the co announced Moody's decision to put its top rating on the company under review. Moody's Investors Service said on Monday it may cut its top ratings on Assured Guaranty due to concerns about securities it guarantees and raising questions over the future need for bond insurance.

"Although we view the commentary from Moody's as extremely vague, we feel the rating agency is taking an ultra-conservative stance given its sustained misjudegment of the larger and more troubled bond insurers over the last 12 months," JP Morgan analyst Andrew Wessel wrote in a note to clients. He lowered AGO to Neutral from Overweight and booted the stock out of firm's Focus List.

Wessel said he no longer believed the comopany will have significant insured production growth through 2009, and lowered his 2008 earnings estimate on the company to $2.00 a share from$2.10. The rate cuts could be "the early stage of the end for the broader bond insurance market in its current form," he said.

- Deutsche Bank is lowering tgt to $13 from $31 and their '08E EPS to $1.75 from $2.10 and '09E EPS to $2.60 from $3.55 following Moody's actions. There could be upside to their target price and EPS estimates to the extent Assured Guaranty can salvage its rating, successfully operate as a double A insurer, or dividend capital in a run-off. They, however, maintain their Hold rating because uncertainty remains on the potential for large losses, future business prospects, and management's capital actions.

To the extent Assured Guaranty can quickly raise at least $1 billion of capital and start a new bond insurer focused on the municipal market, it may be able to continue writing new business and salvage the run-off value of the old insurance company. The rating volatility, however, may have irreparably damaged the value of bond insurance. If that is the case, Assured Guaranty may better suit its shareholders by accepting the downgrade and increasing its dividend, in firm's view.

Notablecalls: I suspect AGO may be a buy here around $10 as:

- Deutsche Bank notes Assured Guaranty had $120 million of capital in excess of the triple A requirement.

- Moody's is being very (extremely!) conservative here & may be lagging the cycle badly.

- Wilbur Ross is involved in AGO in a rather big way. If AGO does need more capital, Ross can probably arrange some swiftly to protect his stake. He has put in his own dinero and will notgo down without a fight. Plus, AGO has access to $750 mln of additional capital under the agreement.